Fertilisers - Update

SECTOR UPDATE 1 APR 2014
Fertilisers

Cycle turning
The last three years were depressing for the Indian
fertiliser sector. Global factors (higher international
RM prices, volatile currency) and local factors (excess
channel inventory, high subsidy receivables and
policy paralysis) led to earnings contraction and
stock de-rating. Absolute stock returns over Apr-11 to
Mar-14 were negative for this sector.
We sense a turnaround over the next 1 year due to
benign raw material prices, stable INR and recent
positive steps taken by the govt. Increasing gas
supply, timely subsidy from the govt (total fuel and
fertilisers subsidy is reducing) and policy action will
drive fundamentals. We upgrade the sector to BUY
with a cautious view on players who are exposed to
gas prices (Deepak Fertilisers and GSFC).
CCEA has approved the NBS for complex fertilisers for
FY15. Barring potash (-18% reduction), subsidies for
other nutrients are unchanged. This will lead to
stable farmgate price/margins. In Feb-14, CCEA
approved an increase in fixed subsidy for urea
players by Rs 350/t; we see this as strong positive.
Positive actions from govt
Recent actions are positive for the sector. (1) No major
reductions in NBS for complex will keep farmgate
prices stable. Decrease in potash subsidy will reduce
govts burden by ~Rs 9bn. (2) Increase in fixed subsidy
for urea by Rs 350/t will boost players profitability.
Additional burden to the govt will be ~Rs 9bn.
Likely Incremental developments : We see the removal
of two major roadblocks in FY15. (1) High subsidy
receivables : Gap of ~Rs 250bn in budgeted vs actual
subsidy requirements in FY13 & FY14 strained the
players financials. We expect part funding of this gap
led by declining burden on the govt (total fuel and
fertilisers subsidy will reduce by ~Rs 250bn in FY15). (2)
Policy uncertainty : Rising visibility of domestic gas and
~30% imported urea may lead to an industry friendly
urea investment policy (scope for ~Rs 300bn capex). A
stable govt may go for price hike in urea (~5% p.a.).
Our View
We see multiple triggers for the sector; (1) Profit
decline is over, worst is behind us (2) Hope for positive
policy actions (3) Improving fundamentals [INR, RM
prices, channel inventory, receivables] (4) Attractive
valuations [value/ time correction is nearing an end].
BUY Coromandel International & Chambal Fertilisers.
FINANCIAL SUMMARY

CMP
(Rs/sh)
Mcap
(Rs bn)
Rating
EPS (Rs/sh) P/E P/BV ROE (%)
FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E
Coromandel Int 218 61.7 BUY 12.7 19.5 24.0 17.2 11.2 9.1 2.7 2.3 2.0 15.9 22.2 23.8
Chambal Fert 40 16.8 BUY 6.4 7.0 7.9 6.2 5.7 5.1 0.8 0.7 0.7 13.8 13.7 14.0
Deepak Fert 118 10.4 NEU 23.9 21.0 22.0 4.9 5.6 5.4 0.7 0.7 0.6 15.2 12.1 11.7
GSFC 55 22.3 NEU 6.9 10.1 11.1 7.9 5.5 4.9 0.5 0.5 0.5 6.8 9.4 9.6
Source: Company, HDFC sec Inst Research
EPS Trend (Rs/sh)
FY12 FY13 FY14E
Coromandel Int 23.4 15.3 12.7
Chambal Fert 8.2 5.6 6.4
Deepak Fert 24.1 16.7 23.9
GSFC 19.6 13.0 6.9

Absolute Stock Returns (%)
3M 1Y 3Y
Coromandel Int (6.3) 12.7 (22.9)
Chambal Fert (0.7) (21.2) (47.6)
Deepak Fert 12.6 19.3 (23.4)
GSFC 1.3 (5.1) (22.9)

Target Price Matrix

TP
(Rs/sh)
Upside
Target
xFY16E
EPS
Coromandel Int 264 21% 11.0
Chambal Fert 51 28% 6.5
Deepak Fert 110 (7%) 5.0
GSFC 56 1% 5.0

Satish Mishra
satish.mishra@hdfcsec.com
+91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

FERTILISERS : SECTOR UPDATE

Relationship between fertiliser dynamics and central govt tenure
Fertiliser sector is a highly sensitive to political factors. We have tried to analyse the actions taken by the govt in the
first half vs the second half of its tenure. Fundamentals which led the govt to take these decisions are also improving
(discussed over next pages). We believe that a stable govt post election will lead to re-rating of the sector.
Current Govts 1
st
phase
2009-2011
Current Govts 2
nd
phase
2011-2014
New Govts 1
st
phase
2014-2016
1. Clearing of all prior period
subsidies. Buyback of earlier
issued bonds
2. Linking urea debottlenecked
capacity with international price
3. De-control of farmgate prices of
complex fertilisers
4. Introduction of nutrient based
subsidy for complex fertiliser
5. 10% price hike in farmgate price
of urea
1. Focus shifted to budget. Under-
provisioning of fertilisers subsidy
2. Sharp cut in NBS led to more than
2x increase in complex fertilisers
prices
3. No urea price hike skewed the
nutrient usage
4. Check on farmgate prices of
decontrolled complex fertiliser
5. No clarity on urea expansion
1. Clearing of all prior period
subsidies. Timely payment of
future subsidies
2. Feasible urea expansion policy
(capex of Rs 300bn)
3. Politically tough steps, like price
hike for urea
4. No interference in complex
fertilisers farmgate prices
5. Clarity on future gas price

Price movement followed fundamentals

Source : Bloomberg, HDFC sec Inst Research

Absolute Stock Returns
3M 1Y 3Y
Coromandel Int (6.3) 12.7 (22.9)
Chambal Fert (0.7) (21.2) (47.6)
Deepak fert 12.6 19.3 (23.4)
GSFC 1.3 (5.1) (22.9)

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CRIN CHMB DFPC GSFC
1
st
PHASE
Current govt

2
nd
PHASE
Current govt
Page | 2


Improving sector fundamentals
Benign international prices : Raw materials and fertiliser prices saw significant jump in 2
nd
phase. Average prices of
ammonia and phosphoric acid increased by 52% and 20% respectively. Similar trend was applicable to urea (+34%) and
DAP (+14%). Current prevailing prices are 30-40% down from its peak in the last 5 years.
Ammonia (US$/t) Phosphoric acid (US$/t)

Stabilising currency : Adverse impact of rising fertiliser/raw material prices multiplied due to weakening INR. Average
currency in the 2
nd
phase was ~18% weaker. Situation has started improving since beginning of CY14.
INR-US$ movement


Price
(US$/t)
1
st

phase
2
nd

phase
Increase
(%)
Ammonia 338 513 52%
Urea 290 390 34%
Phos Acid 714 857 20%
DAP 448 510 14%

1
st

phase
2
nd

phase
Increase
(%)
INR vs US$ 46.4 55.2 18%

40.0
45.0
50.0
55.0
60.0
65.0
70.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
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Avg 338
US$/t
Avg 513
400
600
800
1,000
1,200
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Avg 714
Avg 857
US$/t
Avg 46.4
Avg 55.2
1
st
PHASE

2
nd
PHASE
1
st
PHASE

1
st
PHASE

2
nd
PHASE
2
nd
PHASE
Page | 3


Rising prices and weakening currency led to
ballooning subsidy : High subsidy resulted in gap of
~Rs 250bn in budgeted vs actual subsidy
requirements in FY13 & FY14 which strained the
players financials. We expect part funding of this gap
led by declining burden on govt (total fuel and
fertilisers subsidy will reduce by ~Rs 250bn in FY15).
Elevated subsidy (Rs bn)

Source : Industry reports, HDFC sec Inst Research

Problems kept on multiplying from 2011 to 2014

Rise in prices & weakening currency

Increase in fertilisers subsidy

Decrease in NBS for complex fertilisers

Sharp increase in farmgate prices of complexes

Govt interference in pricing

Skewed N usage and high subsidy receivables

Players took time to adjust to new policy (NBS):
Changing sector variables and new policy (NBS was
introduced in FY11) led to some erratic move by the
players. Fear of sharp cut in NBS led to large push of
materials into the system in 4QFY12. Problems got
further aggravated by large imports by traders taking
advantage of volatile currency/international prices.
We feel that both manufacturers and traders have
learned tough lessons in the four years of NBS history
and no one would like to disturb the equilibrium.
NPK + DAP usage (mn T)

Source : FAI, HDFC sec Inst Research
Farmgate prices (Rs/t)
-
5,000
10,000
15,000
20,000
25,000
F
Y
0
4
F
Y
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7
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Y
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DAP Urea
Rs/t


-40%
-20%
0%
20%
40%
60%
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200
400
600
800
1,000
1,200
FY08 FY09 FY10 FY11 FY12 FY13 FY14EFY15E
Subsidy YoY Gr
Rs bn
-30%
-20%
-10%
0%
10%
20%
30%
-
5.0
10.0
15.0
20.0
25.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14E
NPK + DAP YoY Gr (%)
mn t

Volume decline in FY13 (-27%
YoY) and flat volumes in FY14
have reduced the excess channel
inventory

No major change in NBS will keep
farmgate prices/margins stable
for the industry
Page | 4


Coromandel International - BUY
Govt has kept NBS rates unchanged for FY15 barring
K (18% decline). Stable pricing will lead to stable
margins.
Excess channel inventory in the system has reduced
from ~5 mT to ~1 mT. Stable prices and normal
monsoon will bring volume growth back.
Phos acid availability from TIFERT will lead to increase
in manufacturing proportion from ~77% in FY13 to
~92% in FY15. Margins should improve.
Sabero Organics profitability should grow led by
higher capacity utilisation. Robust growth of non-
subsidy business will lead to valuation upgrade.

Chambal Fertilisers - BUY
CCEA has increased the fixed subsidy for urea players
by Rs 350/t. This will lead to ~14% increase in
Chambals FY15E EPS. However, we have not yet
incorporated it factoring the impact on IPP linked
production post gas price hike.
Decrease in channel inventory of complex fertilisers
and no major decrease in NBS for FY15 augurs for an
improving scenario for trading.
Improving outlook in software biz : Over the last 3-
years it has contributed losses in the range of Rs
0.7bn to Rs 1.1bn/yr at PBIT. Mgt has guided for an
improvement in FY14 onwards.
Key contender for new urea expansion. Cheap
valuations and 4.7% dividend yield protect downside.

Financial summary (Consolidated)
(Rs mn) FY12 FY13 FY14E FY15E FY16E
Net Sales 97,892 89,703 104,455 113,154 123,655
EBITDA 10,544 7,679 7,798 10,366 11,808
APAT 6,626 4,320 3,582 5,514 6,793
Diluted EPS (Rs) 23.4 15.3 12.7 19.5 24.0
P/E (x) 9.3 14.3 17.2 11.2 9.1
P/BV (x) 2.6 2.8 2.7 2.3 2.0
RoE (%) 30.4 18.8 15.9 22.2 23.8
Net D/E (x) 0.8 1.1 1.2 0.8 0.5

Net Sales 75,382 82,020 84,119 90,668 92,059
EBITDA 8,216 6,842 6,799 7,643 7,837
APAT 3,425 2,317 2,672 2,916 3,271
Diluted EPS (Rs) 8.2 5.6 6.4 7.0 7.9
P/E (x) 4.9 7.2 6.2 5.7 5.1
P/BV (x) 1.0 0.9 0.8 0.7 0.7
RoE (%) 20.9 13.0 13.8 13.7 14.0
Net D/E (x) 1.8 2.5 1.9 1.6 1.3

CMP (as on 1 Apr 2014) Rs 218
Target Price Rs 264
KEY STOCK DATA
Bloomberg/Reuters CRIN IN/CORF.BO
No. of Shares (mn) 283
MCap (Rs bn) / ($ mn) 62/1,039
6m avg traded value (Rs mn) 32
SHAREHOLDING PATTERN (%)
Promoters 63.79
FIs & Local MFs 6.02
FIIs 7.50
Public & Others 22.69

Target Price Rs 51
KEY STOCK DATA
Bloomberg/Reuters CHMB IN/CHMB.BO
MCap (Rs bn) / ($ mn) 17/280
Promoters 56.77
FIIs 5.45

Page | 5


Deepak fertilisers - NEUTRAL
Gas price hike is almost certain post the formation of
new govt. Lack of pricing power (chemicals are IPP
linked and fertilisers are indirectly controlled by govt)
will dent profitability.
Growth in TAN volumes is crucial for DFPC. We
expect improvement in mining and infra activities
post new govt.
Stable currency and muted international raw material
prices will boost Deepaks margins. Cheap valuations
and ~5% dividend yield protect downside.
Despite all other variables improving, we maintain
NEUTRAL stand as gas price remains a major drag for
the stock.

GSFC - NEUTRAL
Multiple regulatory overhangs (1) Discontinuation of
subsidy for AS and prior period recovery (BV impact is
Rs 15/sh, ~15% of FY14E BV). (2) Cut in gas supply to
non-urea players.
Lack of pricing power will dent margins post the rise
in gas prices. Viability of newly commissioned
methanol plant (capex Rs 2.7bn) may be at risk.
Caprolactum-Benzene spread is a key variable for
stock performance. It has remained muted at ~US$
1k/t for the last 1 years.
Cheap valuation protects downside. However, we feel
that overhangs will dominate in the near future.
Maintain NEUTRAL.

Financial summary (Standalone)
Net Sales 23,428 26,065 34,862 36,546 37,690
EBITDA 4,008 3,184 4,282 3,860 3,982
APAT 2,130 1,469 2,111 1,849 1,943
Diluted EPS (Rs) 24.1 16.7 23.9 21.0 22.0
P/E (x) 4.9 7.1 4.9 5.6 5.4
P/BV (x) 0.9 0.8 0.7 0.7 0.6
RoE (%) 18.6 11.6 15.2 12.1 11.7
Net D/E (x) 0.5 0.7 0.6 0.5 0.5

Net Sales 53,018 62,533 53,855 60,856 64,288
EBITDA 11,347 7,979 4,541 6,310 7,074
APAT 7,688 5,181 2,758 4,016 4,429
Diluted EPS (Rs) 19.6 13.0 6.9 10.1 11.1
P/E (x) 2.8 4.2 7.9 5.5 4.9
P/BV (x) 0.6 0.6 0.5 0.5 0.5
RoE (%) 24.6 13.9 6.8 9.4 9.6
Net D/E (x) (0.1) 0.3 0.1 0.1 0.1

Target Price Rs 110
KEY STOCK DATA
Bloomberg/Reuters DFPC IN/DPFE.BO
MCap (Rs bn) / ($ mn) 10/174
Promoters 45.46
FIIs 12.89

Target Price Rs 56
KEY STOCK DATA
Bloomberg/Reuters GSFC IN/GSFC.BO
MCap (Rs bn) / ($ mn) 22/367
Promoters 37.84
FIIs 15.64

Page | 6


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